Benson's Economic
& Market TrendsBoomerang Inflation

Richard Benson
Posted May 2, 2011

“What goes around… comes around” is an old adage with common sense logic. It’s just perfect karma for those with an affinity for the concept of eastern thought. However, if this simple cliché means you got what you deserved and justice prevailed, the Federal Reserve has a lot of explaining to do to the American people about the depreciating dollar that, according to the Fed, boosts exports and helps the economy. As a humble student of central banking, I have come to realize it has never occurred to Ben Bernanke that zero interest rates forever (plus QEI and QEII, adding $2 trillion to the Fed’s balance sheet), might do more than just depreciate the dollar.

According to figures compiled by the United Nations, the cost of food worldwide rose 37 percent from February 2010 to this year. You may also have noticed in the news lately that rising food prices have toppled Arab governments around the Mediterranean, and scared Chinese leaders lily white as they face strikes and the nightmare of possible revolution. If only our central bankers could think differently about money printing and the hazards that have resulted because of it. When I fill up at the gas pump now, I can see the inflation from easy money that boomerangs right back at me as I contemplate putting in regular gas (up 30 percent over the past year) rather than a higher grade, which my car calls for.

Boomerang inflation is a weapon that works like this: While the Fed sits back and prints more money like there’s no tomorrow, higher food prices are created worldwide. Some countries have been so badly influenced by rising food costs that their citizens are fighting back by rioting in the streets. The Saudi royal family, not wanting to lose their country to “dumb-ocracy”, had to bribe their citizens with another $150 billion a year in handouts to avoid riots and revolution. The price that America will pay to keep the Saudis running Arabia is a higher oil price. (In order for the Saudis to balance their new government budget, they need oil at over $100 a barrel.) So, by printing too much money, America has effectively been put over a barrel.

The Chinese economy, in the meantime, is feeling the heat as rising food and fuel prices have put incredible pressure on their economy. The government was forced to raise the minimum wage by 20 percent last year and then again this year by another 20 percent. The combination of 10 percent real growth and higher wages has added to the world demand, resulting in budget busting gas, food, and raw material inflation as evidenced everywhere in stores around the globe.

What’s coming next is the inflation boomerang ricocheting back to America accelerated by China’s vicious wage price spiral. Chinese truckers are blocking ports and other workers are striking because they are getting crushed by the rising cost of fuel and food. The government remains afraid of yet another political upheaval reminiscent of the Tiananmen Square protests which rocked China’s leaders to their core as people stood up to the government. It’s highly likely that the leadership there will cave in to the people, rather than be trampled by them, as the unrest continues to build.

Inflation in America could fluctuate even higher due to a big shift in China’s policy of holding their currency down against the dollar. A rising Yuan helps them absorb rising commodity prices, and letting the Yuan appreciate is the last big change they can make to hold back domestic inflation and pray they don’t have riots and demand for political change. A rising Yuan and higher wages also make Chinese workers more competitive with Americans for scarce food and fuel, pushing up their prices even further. China has 1.3 billion people to feed and clothe (a billion more people than America) so any increase in the Chinese currency and wages influences the demand in a very big way for commodities, input costs, and goods America must import. It’s sad but true that stores like Wal-Mart can’t buy American-made goods because it seems we don’t make them anymore.

So, how is the American consumer really influenced by the Fed’s policies of money printing and a falling dollar? In the past few months, the CPI has risen while disposable income has fallen at a five percent annual rate. This is equivalent to putting on a five percent national sales tax. Moreover, if inflation is just measured by the cost of necessities, the cost of living is rising at 10 percent a year. (See: shadowstats).

The current generation is about to learn firsthand what stagflation feels like. With prices rising faster than incomes, and the real standard of living going down, the only thing that has “Made in America” stamped on it is our inflation boomerang balanced by karma coming right back at us. If what goes around comes around – and boomerangs are known for returning to their point of origin – Fed officials should take duck and take cover as an angry public gathers and begins to throw pies in their faces at press conferences after FOMC meetings. (The new press conferences are, of course, being organized to try to convince Americans that the massive inflation is not the Fed’s fault).

During the recession we were told that unemployment was the biggest threat, but now it’s becoming clear to hard working Americans that with the Fed’s soft dollar, they won’t be able to buy a tank of gas to drive to work. The central bank itself is now becoming the biggest threat to the average American.

Richard Benson, SFGroup, is a widely-published
author on securitization and specialty finance, and a sought after
speaker at financing conferences on raising equity for mid-market
companies.

Prior to founding
the Specialty Finance Group in 1989, Mr. Benson acted as a trading
desk economist for Chase Manhattan Bank in the early 1980's and
started in the securitization business in 1983 at Bear Stearns,
and helped build the early securitization businesses at Citibank
and E.F. Hutton.

Mr. Benson graduated
from the University of Wisconsin in 1970 in the Honors Program
in Math, and did his doctoral work in Economics at Harvard University.
Mr. Benson is a member of the Harvard Club of New York and Palm
Beach.

The Specialty
Finance Group, LLC is a Florida Limited Liability Company and
is registered with FINRA/SIPC as a Broker/Dealer.